The stage is set for a strategic shift.

Since this summer, safe haven assets have been catching a bid and outperforming across the board.

Investors are paying attention to growth indicators like ISM and PMI data. Other investors are looking at CPI and paying extra-close attention to the Fed… 

Here's the US Core Inflation Rate along with the 7-10 Year Treasury Bond ETF $IEF. Since inflation peaked and rolled over in 2022, bonds have been building a massive base:

The current market environment is creating a unique opportunity for bonds. 

With the charts signaling strong potential for gains into year-end, now is the moment to take action and add some bond exposure to your portfolio. 

With some big reversals underway, the timing couldn’t be better to capitalize on these new trends. 

Not only are we seeing a growing list of base breakouts for treasuries, corporate bonds, and bond ETFs, but the intermarket landscape is turning increasingly favorable for fixed income in general.

Let’s jump in and discuss why we’re buying bonds here and how we want to express this thesis.

The fed is giving us a clear indication these days that we’ve seen the peak in interest rates for now. The odds of a rate cut at the September meeting in a few weeks are at 67.5%. 

From the desk of Steve Strazza @sstrazza

For the first time in my career, I'm buying bonds.

It has less to do with positioning defensively and more to do with making a call on lower interest rates.

But what it really comes down to, more than anything, is the chart pattern.

Bond funds are completing bearish-to-bullish reversals for the first time in years. 

This is the same exact pattern we've gone back to time and again this cycle... and every cycle, really.

Rounding bottoms are some of the most reliable patterns we have as technicians.

And we're seeing them across the board in bond funds right now.

Let's dive in and talk about some of them.

Here's the US Aggregate Bond ETF $AGG: 

From the Desk of Ian Culley @IanCulley

Here’s what happened last week...

A few bad actors used open profits from highly leveraged positions to purchase other assets.

When those highly leveraged positions turned against them – ripping their faces off – margin calls went unanswered, leading to a lack of liquidity.

Bonds ripped, stocks dipped, and credit spreads blew out. 

Now that the dust is settling, let’s review a few takeaways from last week’s volatility and consider what may lie ahead.

Credit Spreads Had it Right

Bonds hinted at a stock market correction months ago as widening credit spreads failed to confirm new all-time highs.  

The increasing stress on credit markets culminated in the High-Yield $HYG versus US Treasuries $IEI ratio blowing out to its lowest 14-day RSI reading since September 2008:

From the Desk of Ian Culley @IanCulley

US Treasuries are sticking a bullish reversal – an admirable feat following an unforgettable selloff.

If you aren’t buying bonds yet, it’s time to reconsider.

Here's the US T-Bond ETF $TLT trading above a rising 200-day moving average as it violates a multi-year downtrend line:

These are the early signs of a trend reversal.

Now, bond bulls want to witness the 14-week RSI post fresh multi-year highs. (We may see such a print following today’s action.)

Heading into the close, the 30-year T-bond is registering its largest one-week rate of change since spring 2020. And on a more tactical time frame, the 14-day RSI is reaching overbought conditions. 

From the Desk of Ian Culley @IanCulley

Will the Fed finally cut interest rates?

We can’t say for sure… 

All that matters is what the market thinks. And following Powell’s testimony this week, investors are increasing their September rate-cut bets.

Let’s review a few of our recent bond trades, as US treasuries could rip in the coming weeks.

Our entry point for T-bond futures was 117’27:

Price triggered a buy signal last month, but the breakout has been far from decisive.

If you haven’t taken a long position, you can move your risk level to the May 15 close, trading against  118’08.

Or, you can wait for buyers to take out 120’12 (the June 14 close).

Entry tactics aside, we’re targeting last December’s high of 125’30.  

From the Desk of Ian Culley @IanCulley

Chop, chop, chop…

Yields on sovereign debt are chopping sideways across the globe.

The US, France, Germany, Spain, and UK benchmark rates are well below their respective 2023 peaks.

But in Japan, the JGB 10-year yield is hitting its highest level in over a decade. 

Check out the Japan benchmark rate cruising above 100 basis points: 

Earlier in the week, the Japan 10-year yield reached 1.10 for the first time since July 2011. 

While the Bank of Canada, the Swiss National Bank, and the European Central Bank began cutting rates this year, the Bank of Japan (BoJ) may hike later this month. 

You can blame it on a plummeting yen or the BoJ’s Yield Curve Control policies. 

From the Desk of Ian Culley @IanCulley

Mark it, dude.

We have another bearish divergence calling strike three on the stock market rally…

High-yield bonds $HYG versus US Treasuries $IEI.

Check out the HYG/IEI ratio (dark blue line) overlaid with the S&P 500 ETF $SPY:

We use the HY bond-to-US Treasury ratio to track credit spreads. When the dark blue line falls, credit spreads widen – a sign of dwindling liquidity and stress for the bond market (the world’s largest market).

Stocks tend to struggle as credit spreads widen. 

On the flip side, when these spreads contract (or the HYG/IEI ratio catches higher) stocks rally as capital flows into risk assets. That’s why these two lines trend together. 

Notice the HYG/IEI ratio and SPY bottomed last October before rallying into the spring, following a similar path to new highs. 

From the Desk of Ian Culley @IanCulley

The Nasdaq is ripping to new all-time highs. NVIDIA’s market cap is surpassing the three-trillion-dollar mark. And US T-bonds are registering another buy signal. 

But the market’s still a mess. 

Just look at yesterday’s intraday reversal—a bullish reaction to inflation data in the morning, followed by a bearish reaction to the FOMC meeting in the afternoon. Investors are still trying to make sense of the mid-week hoopla.

Friday’s close (the most important data point of the week) will reveal critical information regarding market conviction heading into the weekend.

Meanwhile, you can track high-yield bonds for risk-on confirmation.

Check out the HY Bond ETF $HYG overlaid with the high beta-versus-low volatility ratio (using the $SPHB and $SPLV ETFs):

From the Desk of Ian Culley @IanCulley

G7 central banks are cutting rates – first Canada and now the European Union.

Will the Federal Reserve follow suit in the coming months?

Investors seem to think so…

US 30-year T-bond futures have posted positive returns six days in a row – their longest winning streak since April last year.

T-bonds also broke above a key polarity zone, triggering our buy signals from last month:

I’ve made clear my disdain for buying treasuries, so the long bond trade will likely be a winner. After all, the best trades are often the hardest to take.

From the Desk of Ian Culley @IanCulley

No matter how you slice it, bonds are stuck in a downtrend.

Perhaps bonds are carving out a tradeable low. If so, we have our levels to trade against. But price is falling away from our entry orders, heading in the opposite direction.    

You just can’t buy long-dated U.S. Treasuries right now…

Check out the U.S. T-Bond ETF $TLT:

TLT is trading beneath a downward-sloping long-term (forty-week) moving average and a yearlong downtrend line. Long-term averages and trendlines epitomize the Keep It Simple Stupid (KISS) approach to trend analysis because they work.

From the Desk of Ian Culley @IanCulley

Rates are rolling over… 

And bonds are catching a bid.

After four months of steady selling pressure, US Treasuries are finally carving out a tradeable low.

Let’s take a look!

Regardless of duration, the following bond charts present an identical tactical approach.

Two key themes dominate these trade setups: entry points designated by price reclaiming the February 2024 lows and initial targets set at the December 2023 highs.

Of course, there’s always an exception…

Check out the US 30-year T-bond futures:

Like the following charts, we can measure our risk at a key pivot low from late February.